Building an Investment Thesis around the Amazon HQ2 Announcement

Last night, the New York Times broke a story that Amazon will locate one of their two new headquarters in New York City, specifically in Long Island City (referred to as “LIC” by locals) in the borough of Queens.

What does the Amazon decision really mean for New York City’s residential real estate prices?

Amazon will add 25,000 new jobs to the area, with salaries averaging over $100,000 each. To put this into perspective, JetBlue’s LIC headquarters employs only 500 workers and yet has had a dramatic impact on the neighborhood surrounding its office in Queensboro Plaza. Adding 25,000 new workers -- and all the attendant services required by the new influx -- will dramatically change the landscape of LIC and surrounding neighborhoods.

Transit, Transit, TransitIn general, real estate prices in Manhattan track nearness to public transportation. The LIC submarket already has good connectivity with Grand Central Terminal via the 7 train and with the rest of Manhattan via the E, M, F, N, Q and R lines. The G connects it to Brooklyn, and the Long Island Railroad connects it to all of Long Island. Transportation has been added by water as well with two new ferry stops opening in LIC. Check, check, check--you can get to LIC from almost anywhere you’d want to live in the NYC metro area, except for Staten Island and New Jersey. Here’s a great map of the area.

Great connectivity means that these new workers will find housing all over the metro area. So how can we predict where they are most likely to land and which neighborhoods will benefit (or suffer) the most?

Most of JetBlue’s senior executives commute from Westchester, Connecticut or Manhattan. We think that more (ahem) mature Amazon executives will follow suit, but in general, Amazon’s workforce skews young and millennial. Given the high cost of owning in the NYC metro area, it’s a safe bet that many of their new employees will opt to rent. And when they pick their new rental, they want a reasonable commute on public transportation.

And of course, Sunnyside, a Queens neighborhood along the 7 subway, has been on the smart money’s radar for years.

Long Island City

Dutch Kills is the Next “It” LocationThe neighborhood we’re watching most closely is Dutch Kills, a neighborhood on the edge of Sunnyside Yard in Queens. If you’re trying to figure out where the “next Hudson Yards” will be, it’s here. The city and Amtrak have already begun the master planning phase for the 180-acre Sunnyside Yard redevelopment, and early reports speculate that as many as 24,000 new apartments could be built upon the old rail yard along with schools, parks and other infrastructure—all a few subway stops from Manhattan.

Walking around the neighborhood leaves one with the feeling that it’s still largely industrial and mostly quiet at night, but upon closer inspection, it’s clear that a few glimmers of gentrification have already begun. New, trendy restaurants are starting to dot the area including Dutch Kills Centraal, Dutch Kills Bar, and Il Falco.

Of course, we aren’t the only real estate investors who saw this story unfolding. The city’s old real estate families are notoriously good at selecting the next up-and-coming neighborhood, and Dutch Kills is no different. A few months ago, the Hakimian Organization opened The Addition, a 94-unit, luxury rental building with the amenities and build-quality you’d expect to find in downtown Brooklyn including three rooftop terraces and a dog run. And, four new condo buildings have been announced in Dutch Kills. We expect this neighborhood to outperform the other submarkets due to its relative affordability and proximity to LIC employment centers.

At Compound, we believe that New York City is always a good long-term real estate investment, but investing in the right submarket can generate even more alpha. We watched this happen in Chelsea in the recent past when zoning laws and the Highline Park turned it into a desirable location and prices per square foot dramatically outperformed other submarkets and the market as a whole.

It Ain’t Over Yet

But, the ink is not yet dry on the Amazon deal.

In June 2018, insurance company Aetna announced that they would move their corporate headquarters from Hartford to New York City--to much fanfare. That move would have added 250 jobs to the city’s employment base. But that deal has since unraveled.

And in 2001, MetLife moved their corporate headquarters and 1700 workers from Midtown to Queens. Five years later, MetLife moved everybody back to Manhattan because workers complained that the neighborhood was too “gritty”, lacking in good restaurants and too far from Midtown. The company also complained that an early-morning bus dropped off prisoners released from Rikers Island jails on a street corner about four blocks away from its front door.

Point being, it ain’t over until it’s over, and even when it’s over, things can always change.

Setting aside the political issues like the additional burden this will place on the subway system and that real estate affordability will continue to spiral out of control, at Compound, we smell an opportunity.

That’s because Amazon’s decision signals two important things:

One of the world’s fastest-growing companies deems New York City an ideal location for its talent pool. (Don’t bet against New York City.)

We may have already seen the bottom in this real estate cycle. Positive news like this Amazon decision could be just what all the buyers and investors who have been sitting on the sidelines need to nudge them into buying. Manhattan is typically the last market to fall and the first to recover. New York City’s real estate cycles have notoriously short “bottoms” due to the strong underlying demand fundamentals.

But it’s not too late to invest and participate in future price appreciation. You can start investing in Manhattan residential real estate today with Compound’s city-specific real estate funds.

Get started today. Your future self will thank you.

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